Yale in­vestor Brace­bridge rakes in moola moola for the Boola Boola

Brace­bridge Cap­i­tal is the big­gest hedge fund run by a woman “The bonds don’t know who owns them”

Bloomberg Businessweek (Asia) - - CONTENTS - −Sabrina Willmer and Tom Moroney

Last year was a tough one for hedge fund man­agers, but the Yale En­dow­ment’s bet on one lit­tle-known Bos­ton fund has con­tin­ued to pay off.

Nancy Zimmerman’s Brace­bridge Cap­i­tal has gone from $5.8 bil­lion in as­sets four years ago to $10.3 bil­lion. That makes it the largest hedge fund in the world run by a woman. De­spite this, Zimmerman, who sur­vived a 1990s scan­dal in­volv­ing Rus­sia, her hus­band, and Har­vard, has largely avoided the lime­light.

Brace­bridge was staked with $50 mil­lion in 1994 by David Swensen, who runs the Yale En­dow­ment, and Thomas Steyer, founder of Far­al­lon

Cap­i­tal Man­age­ment. It has re­turned about 10 per­cent an­nu­al­ized since its in­cep­tion and has been one of Yale’s most prof­itable in­vest­ments. It rep­re­sents $1 bil­lion of the en­dow­ment’s $25.6 bil­lion in as­sets.

Swensen, one of the most suc­cess­ful and closely watched en­dow­ment man­agers, has over the years moved away from in­vest­ing di­rectly in stocks and bonds. At the same time, he’s added to hedge funds and so-called ab­so­lute re­turn strate­gies. Such in­vest­ments are ideally sup­posed to move in­de­pen­dently of the ups and downs of the broader mar­ket, with more of the re­turn de­pend­ing on the skill of the man­ager ex­e­cut­ing them. They can be opaque to out­siders. Here’s how Swensen de­scribes Zimmerman’s ap­proach: “She’s em­ploy­ing this lever­aged strat­egy to ex­ploit pric­ing dif­fer­en­tials in the fixed-in­come world with an ob­ses­sive fo­cus on risk.”

Zimmerman her­self of­fers an ex­am­ple of what this means in prac­tice. Brace­bridge will buy a cor­po­rate bond it con­sid­ers to be un­der­priced, while at the same time pur­chas­ing a credit de­fault swap, a kind of in­sur­ance pol­icy on the bond. The fund makes money on the dif­fer­ence be­tween what it earns from the bond and what it pays for the in­sur­ance. It might do the re­verse as well and bet against a bond that seems

ex­pen­sive. Lev­er­age boosts re­turns when its bets make money, but can also mag­nify losses. Since 2009, Brace­bridge has had only eight los­ing months. The fund gained just 2 per­cent in 2015, but that per­for­mance eclipsed the in­dus­try, which was up 0.6 per­cent on av­er­age, ac­cord­ing to data com­piled by Bloomberg. Hedge funds had trou­ble nav­i­gat­ing un­ex­pected events, in­clud­ing a de­val­u­a­tion in the Chi­nese cur­rency in Au­gust, a rally in Euro­pean govern­ment bonds, and a steep drop in oil prices. “There were a lot of go­pher holes that you could step in,” says Gabriel Sun­shine, Zimmerman’s part­ner at Brace­bridge. “We man­aged to miss most of them.”

Brace­bridge’s big­gest win came in 2009: Af­ter los­ing 18 per­cent in the fi­nan­cial cri­sis, it posted a 35 per­cent gain. That sur­passed the 25.8 per­cent re­turn on its near­est bench­mark, the HFRI Rel­a­tive Value in­dex.

The fund’s strat­egy doesn’t al­ways work so well. Long-Term Cap­i­tal Man­age­ment, a highly lever­aged hedge fund run by John Meri­wether, had an ap­proach sim­i­lar to Brace­bridge’s. In 1998, af­ter Rus­sia stiffed lenders in­clud­ing LTCM, that fund failed and was bailed out by its Wall Street com­peti­tors. The fall of LTCM hit other hedge funds in­clud­ing Brace­bridge, which held some of the same as­sets. Brace­bridge lost about 26 per­cent for the year.

In­vest­ments in Rus­sia cast an­other kind of shadow over Zimmerman’s early ca­reer. A few years be­fore LTCM’s fall, in 1992, her hus­band, Har­vard econ­o­mist An­drei Sh­leifer, signed on to help pri­va­tize the Rus­sian econ­omy un­der the aus­pices of the univer­sity and the U.S. govern­ment. Zimmerman bought up be­lea­guered Rus­sian debt, bet­ting its value would rise, court fil­ings show.

Com­plaints arose about Sh­leifer and his busi­ness part­ner al­legedly us­ing their po­si­tion and in­flu­ence for per­sonal gain, ac­cord­ing to court doc­u­ments. Har­vard, Sh­leifer, and the U.S. Depart­ment of Jus­tice even­tu­ally reached an agree­ment in which the univer­sity paid $26.5 mil­lion to set­tle a law­suit and Sh­leifer paid $2 mil­lion. Zimmerman’s com­pany paid $1.5 mil­lion to re­solve civil claims that it im­prop­erly used re­sources and staff from the govern­ment-funded pro­ject. Nei­ther Zimmerman nor her hus­band ad­mit­ted wrong­do­ing in con­nec­tion with their Rus­sia deal­ings.

Steyer of Far­al­lon cashed out af­ter the Rus­sia episode, but Swensen stuck with Zimmerman’s fledg­ling fund. “We took a hard look and found no rea­son to mod­ify our re­la­tion­ship,” says Swensen, who de­scribes him­self as a close friend of Zimmerman’s.

Zimmerman, 52, was born and raised just north of Chicago in Skokie, Ill., the youngest of two girls. While at­tend­ing Brown, she worked sum­mers at a Chicago de­riv­a­tives trad­ing firm, where she stayed for three years af­ter grad­u­at­ing. Her first job there was buy­ing Ja­panese yen op­tions. She owns most of Brace­bridge, ac­cord­ing to a 2015 fil­ing with the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion.

Zimmerman plays down the chal­lenges faced by women in a male­dom­i­nated in­dus­try: “The bonds don’t know who owns them.”

The bot­tom line One of Yale’s most suc­cess­ful in­vest­ments has been a hedge fund mak­ing com­plex lever­aged bets on bonds.

Nancy Zimmerman Education Brown Job his­tory O’Con­nor & As­so­ciates, Gold­man Sachs As­sets $10b Spe­cialty Mak­ing lever­aged bets in the fixed-in­come mar­ket

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